Market power and regulation (scientific background)

To what extent should the government intervene in the marketplace? Economists often consider fiercely competitive markets to be in the public interest. When producers in such markets strive to earn a profit, they are led — as if by an invisible hand — to deliver high quality at low cost. But many industries are not very competitive, and this lack of competition widens the scope for beneficial public intervention. Theories of regulation and competition policy aim to provide useful scientific guidance for such intervention. Clearly, any recommendations must rest on a sound understanding of how imperfectly competitive markets work. When a firm has market power, how will it behave? How does its behavior affect the firm’s suppliers, customers, and competitors? Questions like these are studied within the field of Industrial Organization (IO). George Stigler was awarded the 1982 Prize in Economic Sciences “for his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation”. Since then, however, the IO field has undergone rapid development, indeed a revolution. This revolution has greatly enhanced our understanding of imperfectly competitive markets, which in turn has laid a foundation for better informed competition policy. Comparable progress has been made in the theory of optimal regulation of firms with market power.